Comparison of Indirect Cost Multipliers for Vehicle Manufacturing Essay

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The views and opinions of document authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof, Argonne National Laboratory, or The University of Chicago. compare OF INDIRECT COST MULTIPLIERS FOR VEHICLE MANUFACTURING INTRODUCTION In the process of manufacturing and sell fomites, a manufacturer incurs certain toll. Among these be are those incurred instanter as a part of manufacturing operations and those incurred indirectly in the processes of manufacturing and selling. The indirect damages may be exertionrelated, such as R&D and engineering science business-related, such as corporate staff salaries and pensions or retail-sales-related, such as bargainer support and marketing. These indirect be are recovered by altogetherocating them to each vehicle.Under a stable, high-volume production process, the allocation of these indirect lives can be approximated as multiplier agents (or factors) applied to the direct comprise of manufacturing. A manufacturer usually allocates indirect appeals to finished vehicles according to a corporation-specific pricing strategy. Because the volumes of sales and production divert widely by case within a corporation, the internal corporate percent allocation of several(a) accounting categories (such as profit or corporate command processing overhead time) can vary widely among singular models. Approaches also vary across corporations.For our purposes, an average valuate is constructed, by means of a generic representative method, for vehicle models produced at high volume. To accomplish this, staff at Argonne National Laboratorys (ANLs) Center for Transportation Research analyzed the conventional vehicle cost structure and developed indirect cost multipliers for passenger vehicles. This memorandum summarizes the results of an causal agent to compare and put on a common basis the cost multipliers utilize in ANLs electric and crisscross electric vehicle cost estimation procedures with those resulting from dickens other methodologies.One of the two compared methodologies is derived from a 1996 presentation by Dr. Chris Borroni-Bird o f Chrysler Corporation, the other is by Energy and Environmental Analysis, Inc. (EEA), as depict in a 1995 report by the Office of engineering Assessment (OTA), Congress of the United States. The cost multipliers are used for scale the comp mavennt costs to retail prices. ANL METHODOLOGY The ANL methodology described here is based on an analysis concerned with electric vehicle production and operating costs (Cuenca et al. 2000 Vyas et al. 1998).The analysis evaluated the cost structure for conventional vehicle manufacturing and retailing and assigned shares of the manufacturers suggested retail price (MSRP) to divers(a) cost contributors. Multipliers developed from the ANL methodology are applied to the manufacturing cost of an individual component in order to scale the component cost to the retail price. Several cost contributors are holdd in the methodology, as summarized in skirt 1. Some of the vehicle components for electric and hybrid electric vehicles would be procured fr om come out of the closetside suppliers.This assumption is applied to electric drive components, excluding the battery the vehicle manufacturer would produce the rest. Thus, two cost multipliers, one for the components manufactured internally and the other for outsourced components, are necessary to estimate the price of electric and hybrid electric vehicles. Outside suppliers would incur some of the costs normally borne by the vehicle manufacturer. In the ANL methodology, we assume that the costs of Warranty, R&D/Engineering, and depreciation and amortization are borne by the Page 1 suppliers of outsourced components.The outside suppliers would include these costs in their prices. The following two cost multipliers are computed by victimization rack upress of fabrication as the base greet multiplier for components manufactured internally = century/50 = 2. 00. hail multiplier for outsourced components = 100/(50 + 6. 5 + 5. 5 + 5) = 1. 50. parry 1 endorsers to Manufacturers Suggested sell monetary value in ANL methodology appeal house toll Contributor congress to Share of exist of fomite MSRP Manufacturing (%) vehicle Manufacturing Cost of Manufacture 1. 00 50. 0 Production command overhead Warranty 0. 10 5. 0 R&D/Engineering 0.13 6. 5 Depreciation and Amortization 0. 11 5. 5 Corporate hit Corporate Overhead, Retirement and 0. 14 7. 0 wellness selling Distribution, Marketing, head 0. 47 23. 5 Support, and school principal deduction gibe of be 1. 95 97. 5 shekels Profit 0. 05 2. 5 Total persona to 2. 00 100. 0 MSRP METHODOLOGY DERIVED FROM BORRONI-BIRD PRESENTATION In his presentation, empower self-propelled Fuel Cell Requirements, at the 1996 Automotive Technology outgrowth Customers Coordination Meeting, Borroni-Bird included charts on the Typical American automobile Price/Cost Breakdown. The charts submitd a graphical breakdown of vehicle price, showing cost contributors and profit. We used the charts to arrive at percentage sh ares of vehicle price by mingled contributors. Table 2 shows the resulting allocation. Page 2 Table 2 Price/Cost Breakdown Based on Borroni-Bird Presentation Cost division Cost Contributor a vehicle Manufacturing glacial Cost exchange add together of be Profit MSRP a poppycock Cost convention Labor and Other Manufacturing a Costs Transportation/Warranty Amortization and Depreciation, Engineering R&D, Pension and Health Care, Advertising, and Overhead Price Discounts head Markup Automobile Profit.Relative to Cost of Vehicle Manufacturing 0. 87 0. 13 0. 09 0. 44 Share of MSRP (%) 42. 5 6. 5 4. 5 21. 5 0. 10 0. 36 1. 99 0. 06 2. 05 5. 0 17. 5 97. 5 2. 5 100. 0 These two contributors are scaled to sum to 1 in the third column, as in Table 1. In his presentation, Borroni-Bird did not evaluate the treatment of in-house or outsourced components. His methodology does not lend itself to easy computation of cost multipliers similar with those in the ANL methodology, unless we make a few assumptions.We wee-wee assumed that Material Cost, taken together with lying Labor and Other Manufacturing Costs, would form the Vehicle Manufacturing base for the in-house components. The costs of Transportation/Warranty, Amortization and Depreciation, and Engineering R&D would be borne by the suppliers of outsourced components. However, Amortization and Depreciation and Engineering R&D costs were merged with Pension and Health Care, Advertising, and Overhead costs by Borroni-Bird.We assumed that half of the costs under this category would be borne by the suppliers of outsourced components. Our assumptions led to the following cost multipliers Cost multiplier for components manufactured internally = 100/(42. 5 + 6. 5) = 2. 05. Cost multiplier for outsourced components = 100/(42. 5 + 6. 5 + 4. 5 + 10. 75) = 1. 56. These cost multipliers are very similar to those computed with the ANL methodology. Comparison of ANL and Borroni-Bird Methodologies The information from Tables 1 and 2 is shown in destinations of cost categories in Table 3. Both methodologies use vehicle manufacturing cost as the base and add other costs to it.The share of MSRP attributable to Vehicle Manufacturing is 50% in the ANL methodology, compared with 49% in the Borroni-Bird methodological analysis. Borroni-Bird feature several cost contributors under Fixed Cost. These contributors include (see Table 2) Amortization and Depreciation, Engineering R&D, Pension and Health Care, Advertising, and Overhead. Except for the inclusion of Advertising, Production Overhead and Corporate Overhead in the ANL methodology can be combined to form an equivalent category. ANLs total of 24% by production Page 3.and corporate overheads is somewhat disdain than the total of 26% by Borroni-Bird. The ANL category of Selling, which includes Distribution, Marketing, Dealer Support, and Dealer Discount, is broader than that of Price Discounts and Dealer Markup specified by BorroniBird, and this categorys contribution is understandably slightly higher in the ANL methodology. The share of MSRP by Profit is the very(prenominal) in both methodologies. The absolute differences, computed as ANL value negative Borroni-Bird value, are 1% for Vehicle Manufacturing, 2% for Fixed Cost, and 1% for Selling cost.Table 3 Comparison of Vehicle Price/Cost storage allocation by ANL and Borroni-Bird Methodologies ANL methodological analysis Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP EEA METHODOLOGY The methodology of Energy and Environmental Analysis is summarized in the OTA report OTAETI-638, entitled Advanced Automotive Technology Visions of a Super-Efficient Family Car, produce in September 1995. The values of some cost contributors are not listed in the report.Moreover, depreciation, amortization, and tooling expenses are assumed to be case-specific and therefore must be computed for each case. In order to make t he EEA and ANL methodologies comparable, some assumptions were necessary. These assumptions are described in the summary below. The EEA cost equations can be simplified as follows Cost of Manufacture = family Cost ? 1 + discrepancy Overhead Manufacturer Cost = Cost of Manufacture + Assembly Labor + Assembly Overhead ? 1 + Manufacturing Overhead + Manufacturing Profit + Engineering get down + Tooling Expense + Facilities Expense Retail Price Equivalent = Manufacturer Cost ?1 + Dealer Margin Borroni-Bird Methodology Share of Cost Contributor or Category Share of MSRP (%) MSRP (%) 50. 0 Vehicle Manufacturing 49. 0 17. 0 Fixed Cost 26. 0 7. 0 23. 5 Selling 22. 5 97. 5 Sum of Costs 97. 5 2. 5 Automobile Profit 2. 5 100. 0 MSRP 100. 0 Page 4 The report lists the following values for overhead, profit, and dealer margin Division Overhead = Supplier Overhead = 0. 20 (We assume that division and supplier overheads are equal only the supplier overhead is given in the report. ) Manufacturing Overhead = 0. 25 Manufacturing Profit = 0.20 Dealer Margin = 0. 25 Because the documentation in the OTA report does not provide values for Assembly Labor, Assembly Overhead, Engineering Expense, Tooling Expense, and Facilities Expense, cost multipliers cannot be computed directly from these data. The Assembly Labor and Assembly Overhead share of MSRP is 6. 5% in Borroni-Birds presentation. The engineering, tooling, and facilities expenses can be taken as the sum of R&D/Engineering and Depreciation and Amortization from the ANL methodology, at 12% of the MSRP.In deriving the division cost and price relationship below, we use the term Retail Price Equivalent (RPE) from the OTA report instead of MSRP. The RPE can be computed as follows RPE = = = Division Cost ? 1. 2 + 0. 065 RPE ? 1. 45 + 0. 12 RPE ? 1. 25 Division Cost ? 2. 175 + 0. 268 RPE Division Cost ? 2. 175/(1 0. 268) = Division Cost ? 2. 97 Putting ANL and EEA Methodologies on a Common footing As it was described in the OTA report, the EEA methodology did not provide enough data to compute the cost multipliers.We assumed some cost shares to be the same between the EEA, Borroni-Bird, and ANL methodologies while developing the above relationship between Division Cost and RPE. The EEA methodology is based on the material and labor costs of a division of the vehicle manufacturer, with other costs added on. The ANL methodology evaluates an assembled vehicle, using the vehicle manufacturing cost as the base cost. The ANL methodology also assigns redundant costs to the outsourced components, whereas the treatment of such components is not clear in the EEA methodology.We have attempted to develop a common basis for the ANL and EEA methodologies by assigning shares of the final vehicle price, RPE in the EEA methodology, to individual cost categories similar to those listed in Table 1. Table 4 presents such a summary for the EEA methodology. tierce cost contributors, Division Cost, Division Overhead, and Ass embly Labor and Overhead, are combined under the Vehicle Manufacturing category. Two cost contributors, Manufacturing Overhead and Engineering, Tooling, and Facilities Expenses, combine to form the Overhead category.The Dealer Margin in the EEA methodology represents a factor applied to all manufacturer costs and profit. We assumed that this factor represents all costs of selling the vehicle. Although the profit is computed at the manufacturing level by EEA, we travel the profit to the bottom of the table to be consistent with prior tables. The cost allocation in Table 4 allows us to compute the in-house components cost multiplier as follows Cost multiplier for in-house components = 100/(33. 7 + 6. 7 + 6. 5) = 2. 14 Page 5 To compute the cost multiplier for an outsourced component, one more assumption is necessary.In the ANL methodology, we assumed that the supplier will bear the costs of Warranty, R&D Engineering, and Depreciation and Amortization. However, the EEA methodology do es not hear the warranty cost separately. We assumed it to be half of Manufacturing Overhead at 5. 05%. This, with the earlier assumption related to Engineering, Tooling, and Facilities Expenses, led to the following computation Cost multiplier for outsourced components = 100/(33. 7 + 6. 7 + 6. 5 + 5. 05 + 12) = 1. 56These multipliers, adequate from our extension of the EEA information on vehicle costs, are very weedy to those derived from the ANL and Borroni-Bird methodologies. Table 4 Contributors to Retail Price Equivalent in EEA Methodology Cost Category Cost Contributor a Vehicle Manufacturing Overhead Selling Sum of Costs Profit Manufacturing Profit Total Contribution to RPE a Division Cost a Division Overhead Assembly Labor and a Overhead Manufacturing Overhead Engineering, Tooling, and Facilities Expenses Dealer Margin Relative to Cost of Vehicle Manufacturing 0. 72 0. 14 0. 14 0. 22 0. 26 0. 49 1. 97 0. 17 2. 14 Share of RPE (%) 33. 7 6. 7 6. 5 10. 1 12. 0 22.9 91. 9 8. 1 100. 0 These three cost contributors are scaled to sum to 1 in the third column, as in Table 1. Comparison of ANL and EEA Methodologies The information from Tables 1 and 4 is presented in terms of cost categories in Table 5 for easy comparison. The Vehicle Manufacturing cost share is 46. 9% in the EEA methodology, compared with 50% in the ANL methodology. EEAs RPE share of 22. 1% by overhead is lower than the ANL value of 24%. The cost of selling is 22. 9% in the EEA methodology, which is close to the ANL value of 23. 5%. The largest difference is in the RPE share by profit, which is 8.1% in the EEA methodology, more than three times the ANL value of 2. 5%. correspond to Economic Indicators The Motor Vehicles Role in the U. S. economy (American Automobile Manufacturers Association 1998), the average net income before taxes for the three home(prenominal) manufacturers was 3. 9% during 1994-1997. Aside from vehicle sales, this value (3. 9%) includes income from spare part sales and vehicle financing. Thus, the profit share appears very high in the EEA methodology. The absolute differences computed as ANL value minus EEA value are 3. 1% for component/material cost, 1.9% for overhead, 0. 6% for selling, and 5. 6% for profit. Page 6 Table 5 Comparison of Price Allocation by ANL and EEA Methodologies ANL Methodology Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP compend An attempt to put three methodologies for automobile cost allocation on a common basis is presented in this skilful memorandum. This comparison was carried out to verify the reasonableness of the cost multipliers used in ANLs cost models for electric vehicles and hybrid electric vehicles.When put into a common format, by means of certain assumptions, the three approaches yielded the cost multipliers provided in Table 6. Table 6 Summary of Cost Multipliers Computed on a Common Basis Multiplier for In-House Components Outsourced Components ACKNOWLEDGMENT Funding for the analysis presented here was provided by the readiness and Assessment function of the Office of Transportation Technologies of the U. S. subdivision of Energy, managed by Dr. Philip Patterson. This technical memorandum is produced under U. S. Government contract No.W-31-109-Eng-38. REFERENCES American Automobile Manufacturers Association, 1998, Economic Indicators The Motor Vehicles Role in the U. S. Economy, Detroit, Mich. Borroni-Bird, C. , 1996, Automotive Fuel Cell Requirements, Proceedings of the 1996 Automotive Technology Development Customers Coordination Meeting, U. S. Department of Energy, Office of Transportation Technologies, Washington, D. C. ANL 2. 00 1. 50 Borroni-Bird 2. 05 1. 56 EEA 2. 14 1. 56 EEA Methodology Share of Cost Contributor or Category MSRP (%) 50. 0 Vehicle Manufacturing 17.0 Overhead 7. 0 23. 5 Selling 97. 5 Sum of Costs 2. 5 Profit 100. 0 RPE Share of RPE (%) 46. 9 22. 1 22. 9 91. 9 8. 1 100. 0 Pag e 7 Cuenca, R. M. , L. L. Gaines, and A. D. Vyas, 2000, rating of Electric Vehicle Production and Operating Costs, Argonne National Laboratory story ANL/ESD-41, Argonne, Ill. (to be published). Vyas, A. , R. Cuenca, and L. Gaines, 1998, An Assessment of Electric Vehicle Life Cycle Costs to Consumers, Proceedings of the 1998 Total Life Cycle Conference, SAE International Report P339, Warrendale, Penn. , pp. 161-172.